16 Oct Divorce 101, Part 1: New Maintenance Law
There are many factors taken into consideration when determining the amount of spousal maintenance that is awarded as the result of a divorce. A maintenance award is intended to allow the receiving spouse to be financially independent after the divorce is finalized. The Tax Cuts and Jobs Act (TCJA) is a new federal law that will take effect on January 1, 2019 and it could result in significant changes to your personal income taxes if you are expecting to finalize your divorce in the coming year.
Current Maintenance Law
Currently, spousal support is a tax deduction for the payor and is considered taxable income to the payee. This allows spouses and ex-spouses to shift some of the taxable income of the family as a whole to the spouse in a lower tax bracket.
New Maintenance Law
The new maintenance law will no longer allow those paying spousal support to claim it as a deduction on their taxes. The payee will no longer have to claim the spousal maintenance as income. The changes in the way spousal maintenance is treated on taxes will affect the amount of maintenance that is awarded because the Courts are required to consider the tax implications when making a maintenance award.
How This May Affect Those Who Are Already Divorced
If your divorce is already finalized and you have been paying or receiving spousal maintenance, you are grandfathered into the current law. The individual paying the maintenance will continue to be able to deduct their spousal maintenance payments on their taxes and the payee will continue to have to claim it as income. However, if your divorce is already finalized but one party seeks a modification of the maintenance obligation, the new law will affect any subsequent modification agreement.
If you expect to be obligated to make spousal maintenance payments after the finalization of your divorce, it may be to your benefit to finalize your Settlement Agreement or get divorced prior to January 1, 2019. For help navigating your divorce, contact Wesley Clark & Peshkin LLP to schedule a confidential consultation.